Fintech companies have increasingly started targeting SMEs looking for ways to finance their businesses, but fintechs shouldn’t expect a revolution without a few setbacks.
At least, that’s the view of some of the industry’s own experts and participants. With the market having had a few years to run its course, digital lenders, payment platforms and other financial technology firms have been given a warning: change, or face extinction.
The changing face of fintech
In lieu of more banking alternatives, fintech companies have increasingly started targeting more specific niches. It’s these businesses – not just those offering simple loans – that will end up surviving a glut of entrants, experts say.
“Fintech…is where you get the most people out of the industry who deeply understand what’s going on,” says Kim Heras, partner at tech startup hub 25fifteen, which houses three fintech startups.
“Fintech tends to have older, more mature people who understand the industry. And I think that’s why you’re seeing this wider range of fintech startups because of the people coming out of financial services.”
Fintech is no doubt established as a serious market, with the Australian Government announcing funds in the most recent Federal Budget to establish Australia as a hub for the industry – along with the relaxation of rules for businesses to experiment with new products.
That experimentation is warranted. The market, according to Frost & Sullivan, will explode to add $1 billion by 2020. One KPMG study from this year found alternative finance grew by 320% in 2015 to $460 million.
Much of that will be in lending focused on small businesses, as dissatisfaction with the major banks remains at high levels; former NAB business bank head Joseph Healy has even set up his own fintech venture Judo Capital, which is marketed to businesses with turnover up to $20 million.
But according to Neil Slonim, an independent banking advisor and founder of thebankdoctor.org, the overcrowded marketplace is making it harder for new entrants to survive. Additionally, he says, fintech lenders haven’t faced a credit crisis, and it’s unclear what will happen when they do.
“The fintech lenders only represent a small proportion of the whole industry,” he says, adding that these businesses may be subject to the same credit restrictions that affect the major banks.
“I think the biggest challenge a fintech leader has is being able to clearly able to articulate their customer value proposition.”
While the fintech industry as a whole is growing, Slonim says, and the space presents a key opportunity for SMEs to find unsecured credit, he also adds a rising number of opportunities can be found in specialised fintech.
The two-speed fintech economy
The fintech market is operating at two different speeds.
At one speed are the lenders. Coming after the arrival of companies like SocietyOne a few years ago, these operators are multiplying at a rapid rate with new partnerships occurring constantly. And they’re mostly targeting SMEs.
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For instance, businesses such as Pin Payments, which allows businesses to accept payments from local and international customers, has partnered with Moula for businesses to fill out loan applications. Moula itself received a boost in early August after Xero managing director Chris Ridd joined the company’s board.
Reckon has also partnered with Prospa to offer business loans and Westpac entered the market through a minority stake in Valiant Finance, which it provided with $800,000 in seed funding in June.
These partnerships and funding rounds are becoming more prolific. Lender ThinCats recently announced a partnership with investment platform operator DomaCom, while earlier this year, Spotcap closed a $50 million funding round. Lenders backed by Amazon and PayPal have entered the market, and an entire hub for startups focused on fintech – Stone and Chalk – is operating in Sydney.
This comes after a number of fintech firms such as Tyro have been operating in the same space for years. The company recently acquired a banking licence and will offer loans.
But these businesses can only go so far, industry players say. With so many lenders, it can be difficult to articulate a unique value proposition.
Which means the second speed of the fintech economy – niche finance areas – has greater potential, they argue.
Brett Isenberg, general manager at supply chain finance group Octet Finance, says sustainable growth will come from locking down areas of specialisation – not just copying a banking strategy.
“If you look at the United States, which is 12 to 18 months ahead of us, a lot of the liquidity is drying up because hedge funds are not looking for lending in low interest rate environments,” he says.
“I think the interesting players will not be necessarily in the clones, and moreso in the specialisation businesses. I think our country has shown a lot less emphasis on those types of businesses.”
Businesses such as Stockspot, which provides financial advice, fit squarely in this description. Many of these are not even startups: payments group Tyro was founded in 2003, while visualisation group VisualRisk started at the beginning of the century. The company provides data visualisation tools for businesses, specialising in financial data.
Many of the businesses in the Stone and Chalk hub aren’t focused on lending at all. Fincast, for instance, provides applications for financial advisors. FundX provides invoice financing – typically a niche area – and there’s even EdStart, which is a financing method for private school fees.
This move towards specialisation comes as fintech lenders are experiencing some growing pains. In the United States, Lending Club shares have fallen more than 80% since their debut in 2014. Closer to home, banking start-up ChimpChange fell 30% on its initial public offering, although shares have since recovered.
Isenberg argues the lacklustre response to some of these firms is exactly why fintech start-ups targeting SMEs need to focus on specialised areas that require more technical skill and expertise than simple lending.
“Some really intrinsically useful offerings will be the ones that survive,” he says.
“In the SME lending space, one or two of them may be around, the bigger ones, but I think the hype will die off quickly.”
This is exactly why insurance companies are beginning to play in this space, argues Heras. Insurance Australia Group (IAG) recently started an “innovation hub”, while Suncorp started a similar venture in 2013.
“You’re starting to see insurance companies starting to realise they need to do something,” he says.
How should SMEs respond?
Slonim says there are two considerations for SMEs in the wake of the growth in fintech providers.
The first is that businesses borrowing from fintech firms need to be careful. The key technology underlying lending is not particularly unique, Slonim says, and online lenders have a problem establishing differentiation, which can lead to exaggerated claims.
“All these lenders say, ‘we’re quick’. Well, of course you’re quick when you have clever algorithms – but it’s not that complex. It’s just applying banking parameters to data and calculating risk,” he says.
“Most of these companies have yet to turn a profit … and you might ask yourself, well, I’m borrowing from them, not investing, so why should it matter?
“It matters because you get caught up in it. If one of them were to falter, or to have a receiver appointed…it will probably happen at some stage.”
Slonim warns this matters because the market hasn’t observed what happens when a fintech lender closes.
The other consideration, Slonim says, is that seeking out opportunities among non-lending fintech firms requires investigation.
But Kim Heras says this is where the opportunities will be found – for both borrowers and lenders alike.
“I’m bullish,” he says. “I’m not sure what’s going to happen, but we’re confident there is real opportunity in this space.”
“Even if the hype goes down for some … I don’t think it’s going away entirely.”